Economy
Minister Zafer Çağlayan opened the show, but it was Prime Minister Recep Tayyip
Erdoğan who stole it with amusing comments I summarize at my blog. The less temperamental
Finance Minister Mehmet Şimşek decided to engage in a more scientific debate by
questioning the agency’s debt figures, and S&P issued a note to
clarify. He also emphasized that Turkey’s debt was lower than several
crisis-stricken countries rated above Turkey.

But
debt is only one of the variables S&P bases its decision on. There is also
the current account deficit, and although the Central Bank is claiming otherwise,
neither the quantity nor the quality of its financing is improving. Foreign
direct investment has crept up because of one-off deals, and corporate
borrowing is improving after negative figures during the crisis, but fickle
portfolio flows still make up a sizable share of the capital account. And if
capital flows are abundant, as the Bank hopes, the economy will become yet more
vulnerable to a reversal, as S&P underlines.

In a video
released along with the decision, primary Turkey credit analyst Eileen Zhang
notes that they also look at per capita income. Turkey’s GDP per person is half
of Portugal’s and one third of Italy’s, as reflected by low
productivity and women’s
labor force participation. That’s why Royal Bank of Scotland’s Tim
Ash suggests that Turkey’s willingness to pay its debts, i.e. its track
record, should be taken into consideration, implying a change to the agency’s
methodology.

Many
were also surprised because the S&P announcement came right after March
trade figures hinted that the long-awaited current account adjustment had
begun. But as I argue in my
blog, those figures may be deceptive. Besides, “less-buoyant external demand
and worsening terms of trade could inhibit Turkey's economic rebalancing”, as
S&P notes.

During
a phone chat on Friday, Zhang explained this statement, citing global
liquidity, external demand and oil prices as the key risks in the next 12
months. S&P has decreased their 2012 growth forecast for the Eurozone from 0.4 percent in
December of last year to no growth in April.
These more pessimistic projections are undoubtedly having an effect on Turkey's
outlook.

Zhang
is actually more optimistic on the Turkish economy than me: She also noted that
“Turkey was doing relative well on policy effectiveness, moderate indebtedness
and monetary
policy flexibility”, which “give Turkey the fiscal space and flexibility to
deal with potential external shocks”.

Besides,
the Turkish fury to the downgrade was really much ado about nothing. Zhang
underlined that Turkey was one of the last European countries to lose the
positive outlook. Although I did not pursue this with her, the decision may
have been technical: A positive outlook would have meant the possibility of a
ratings upgrade in the near future, which is not realistic given the global
uncertainties and Turkey’s own vulnerabilities.